09.14.16

I’ve been thinking a lot about the failure of Google Fiber and if there are any wider lessons about whether Silicon Valley will ever be able to compete effectively as an owner and builder of telecom networks, or indeed in other large scale capex intensive businesses (such as cars).

One conclusion I’ve come to is that there may be a fundamental incompatibility between the planning horizon (and deployment capabilities) of Silicon Valley companies and what is needed to be a successful operator of national or multinational telecom networks (whether fiber, wireless or satellite). The image above is taken from Facebook’s so-called “Little Red Book” and summarizes pretty well what I’ve experienced living and working in Silicon Valley, namely that the prevailing attitude is “There is no point having a 5-year plan in this industry” and instead you should think just about what you will achieve in the next 6 months and where you want to be in 30 years.

In software that makes a lot of sense – you can iterate fast and solve problems incrementally, and scaling up (at least nowadays) is relatively easy if you can find and keep the customers. In contrast, building a telecom network (or a new car design) is at least two or three years’ effort, and by the time you are fully rolled out in the market, it’s four or five years since you started. So when you start, you need to have a pretty good plan for what you’ll be delivering (and how it is going to be operated at scale) five years down the road.

For an existing wireless operator or car company that planning and implementation is obviously helped by years of experience in operating networks or manufacturing facilities at scale. But a new entrant has to learn all of that from scratch. And it’s not like technology is transforming the job of deploying celltowers, trenching fiber or running a vehicle manufacturing line. Software might change the service that the end customer is buying, but it’s crazy to think that “if tech companies build cars and car companies hire developers, the former will win.”

Of course self-driving cars will drastically change what people do with vehicles in the future. But those vehicles still have to be made on a production line, efficiently and with high quality. Mobile has changed the world dramatically over the last 30 years, but AT&T, Deutsche Telekom, BT, etc. are still around and have absorbed some of the most successful wireless startups.

Moreover, Silicon Valley companies simply don’t spend capex on anything like the scale of telcos or car companies. In 2015 Alphabet/Google’s total capex for all of its activities worldwide was $9.9B and Facebook’s capex was only $2.5B (surprisingly, at least to me, Amazon only spent $4.6B, though Apple spent $11.2B and anticipated spending $15B in 2016).

But the US wireless industry alone invested $32B in capex in 2015, which is more than Facebook, Google, Amazon and Apple put together, and that excludes the $40B+ spent on spectrum in the AWS-3 auction last year. In the car industry, GM and Ford each spent more than $7B on capex in 2015. So in round numbers, total wireless industry and car industry capex on a global basis are both of order $100B+ every year, a sum that simply can’t be matched by Silicon Valley.

Undoubtedly some other Silicon Valley companies will end up trying to build their own self-driving cars. But after the (continuing) struggles of Tesla to ramp up, it seems more likely that most startups will end up partnering with or selling their technology to existing manufacturers instead. And similarly, in the telecom world, does anyone believe Google (or any other Silicon Valley company) is going to build a new national wireless broadband network that is competitive with AT&T, Verizon and Comcast?

It seems to me that about the best we could hope for is for Google to push forward the commercialization of new shared access/low cost frequency bands like 3.5GHz (e.g. as part of an MVNO deal with an existing operator) so that the wireless industry no longer has to spend as much on spectrum in the future and can deliver more data at lower cost.

If Facebook and Google are now simply going to come up with clever technology to reduce network costs (rather than building rival networks) or even just act as a source of incremental demand for mobile data services, then that will be good for mobile operators. Those operators may just be “dumb pipes,” but realistically, despite Verizon’s (flailing) efforts, that’s pretty much all they could hope for anyway.